Channel Strategy for Corporate Banking: Is Your Bank Paying Enough Attention?

According to the GTNews 2016 Transaction Banking Survey Report, 91% of North American corporates are evaluating their cash management partners. Of those, 27% indicated that improving availability of online and mobile banking tools were a major reason for reviewing their bank relationships, and 55% cited the need for an improved customer experience. Clearly, these responses are evidence that large numbers of corporate clients are less than satisfied with the channel tools and the overall digital client experience being offered.  Most of the banks we interviewed for recent research on this topic are hearing loud and clear that clients are looking for more streamlined, convenient, and faster access to banking services and information.  Our recent report, Strategies for Enhancing Corporate Client Experience: The Future of Attended Channels looks at strategies that leading North American and global banks are adopting to achieve the following goals:
  • Build out integrated portals to make invisible the organizational and product silos inherent in corporate banking.
  • Simplify the user experience.
  • Establish an omnichannel approach to providing consistent data and access to transactions across channels.
  • Enhance authentication options, including biometrics.
  • Expand self-service, including the ability to securely exchange documents and open accounts and new services.
While we found broad agreement on importance of the themes described above, we identified other aspects of digital channel strategy that varied widely from bank to bank.  The graphic below summarizes those opportunities for differentiation. Celent recommends that banks take the following steps to optimizing their future investments in attended channels:
  1. Define the Digital Strategy for Corporate Banking, Not Just the Digital Channel Strategy.  In the current environment, attempting to implement a successful strategy for digital channels in the absence of an overall digital transformation strategy for corporate banking is short-sighted.
  2. Understand How Attended Digital Channels Fit into Clients’ Daily Workflow.  Product management and strategy executives at many institutions are driving prioritization in channels based on a set of assumptions about client preferences that may not be valid. Mapping those client digital journeys from onboarding to servicing to managing exception situations for each client persona is critical.
  3. Reexamine the Role of Partners.  In reality, the delivery of services through attended channels has always involved multiple partners, whether the bank has developed an “in-house” solution or offers one or more off–the-shelf vendor solutions. As demands for “non-core” banking functionality grows and technology evolves to enable easier integration with multiple partners, the importance of the bank maintaining control of the user experience layer that is seen and touched by the client becomes even more critical.
The decisions being made today about attended digital channels — whether as a part of a larger digital transformation initiative, enhancing the channel user experience, or establishing a corporate banking portal — will have a significant impact on the ability of corporate banks to attract and retain clients.

Model Bank 2017: Some First Impressions

Growing up, a family Christmas tradition was that my mother would ritualistically proclaim, “That’s the most beautiful tree ever.” It seems that way with Celent’s Model Bank awards, too. In our tenth year we’ve just been through more than 150 submissions, and just like my mother, I can say that this was the best crop yet. The quantity emphatically broke records, and the quality was outstanding. Ongoing innovation in banking technology is clearly beginning to pay off, and we’ve been privileged to learn an immense amount from all of the financial institutions that took the time to tell us about their how they’ve been using technology and innovation to serve customers better, become more efficient, and mitigate risk.

Those who’ve followed the Model Bank Awards closely will note that our awards format has evolved to follow the market over the years. As the imperative to be more customer-centric has become more pressing, it has in turn begun to blur the lines between one of the oldest ways to divide banking: channels. And lines elsewhere begin to blur, too – for instance, should a mobile payments initiative be in mobile, or in payments, or in its own category? We’ve addressed this conundrum with five categories chosen to provide a broad cross-section of the banking landscape.
  • Customer Experience
  • Products
  • Operations and Risk
  • Legacy Transformation / IT Platform Innovations
  • Emerging Innovation
The entries were exceedingly diverse, and came from repeat submitters and new participants. EMEA led the pack quantitatively, with APAC and North America roughly the same, and the strongest showing yet from Latin America. We expected to see nominations around digital banking, branch and core transformation, and payments, to name a few, and we weren’t disappointed. We were also pleasantly surprised to see intriguing initiatives involving employee productivity, cross-selling, AI, Biometrics, and Blockchain.

Inevitably some will be disappointed; there were so many worthy initiatives that the judging was the most difficult by far. It’s certain, though, that Celent analysts will have a full plate for the next two months as we reach out to our Model Banks and complete the work of distilling their rich stories into pithy case studies that illustrate the incredible innovations banks are undertaking today.

As for what you can expect between now and April 4 in Boston, look for a series of articles from the Celent analyst team highlighting some of the many insights that we’ve gleaned along the way. We’d recommend that you check back in; as we notify the winners and begin to develop our case studies, we’ll keep you posted with a series of articles like this one that detail some of the insights.

And while space is filling up fast, there’s still time to register for 2017 Innovation & Insight Day, April 4, 2017 in Boston, Massachusetts. Find out more about last year’s event here.

Megavendors and transaction banking: reinvesting in digital corporate banking

Earlier this month, Fiserv announced that it is acquiring Online Banking Solutions (OBS), a privately held provider of niche treasury management capabilities. OBS has seen a great deal of success in enabling community banks, credit unions and some regional banks with the digital capabilities needed to meet the emerging needs of more sophisticated business and corporate clients for treasury management services.  As a long-time observer and participant in this space, I think it is fair to say that most of the largest providers of financial services technology (megavendors) have underinvested in corporate banking, especially in modern, digital treasury solutions.  From a back-office processing perspective, Fiserv has a key collection of assets (e.g. PEP+, ARP/SMS) on which large banks in the US heavily depend to deliver their treasury management services.  The acquisition brings a suite of first-class front-office digital channel solutions to Fiserv that should allow it to be competitive in offering omnichannel solutions specifically designed for corporate treasury users and that consider the multitude of ways that corporates consume bank information and generate transactions. Celent believes that the winners in this space will have a broad transaction banking strategy that includes international services (cross border payments, foreign exchange, trade finance) bringing all commercial banking assets into a coherent go-forward strategy, if not a single organizational unit.  Partnerships to extend transaction banking functionality is a great step toward that end but they need to be well-defined and well-executed to benefit the providers’ clients.  In 2017, we think that other technology providers will follow suit and broaden their transaction banking solutions.  FIS has certainly made a mark with its 2015 acquisitions of SunGard and Clear2Pay.  Bringing these assets together and delivering on a next generation digital platform will be critical for FIS to meet the growing needs of corporate clients for global banking services.  Other providers of digital channel solutions such as ACI Worldwide, Bottomline Technologies, D+H, Q2 Software and others will be looking at these developments closely to understand the impact on their competitive positions. With the acquisition of OBS, there are no more niche providers of corporate digital channels left in North America.  Almost ten years after the great financial crisis when income from fee-based solutions was the salvation of the industry, reinvestment in the transaction banking business is finally happening.  

Banking Third Party Risk Management Requirements are a Big and Expensive Ask

Celent, through its work with Oliver Wyman, estimates the cost to US financial institutions of undertaking due diligence and assessment of new third party engagements to be ~ $750 million per year. Institutions are paying three times as much as their third party to complete on this exercise. The average cost to an institution to carry out due diligence and an assessment of a new critical third party engagement is $15,000 and takes the institution approximately 16 weeks to complete.

The top ten US banks average between 20,000 and 50,000 third party relationships. Of course, not all of these relationships are active or need extensive monitoring. But the slew of banking regulatory requirements for third party risk management is proving to be complex, all-consuming and expensive for both institutions and the third parties involved. In a nutshell, institutions are liable for risk events of their third and extended parties and ecosystems. The FDIC expresses best the sentiment of worldwide regulators:

“A bank’s use of third parties does not relinquish responsibility… but holds it to the same extent as if the activity were handled within the institution." www.fdic.gov

If an institution doesn’t tighten its third party risk management, it is significantly increasing the odds of a third party data breach or other risk event and will suffer the reputational and financial fallout.

In the first report of a two-part series, just published by Celent, “A Banker’s guide to Third Party Risk Management: Part One Strategic, Complex and Liable”, I show how institutions can take advantage of their established risk management practices such as the Three Lines of Defense governance model, and operational risk management processes to identify, monitor and manage the lifecycle of critical and high-risk third party engagements across functions and levels. It describes the components required for a best-practice program and shows examples of two strong operating risk models being used by the industry that incorporates third party risk management into the enterprisewide risk management program.

Unfortunately, there are few institutions that have successfully implemented strategic third party risk management programs. Most institutions fall between stage 1 and 2 of the four stages of Celent’s Third Party Risk Management Maturity Curve. But continuing to operate without a strategic third party risk management practice will leave your institution in the hands of cyber fate and the regulators.

Globalisation: External Forces Driving Corporate Growth and Expansion

Treasury management plays an important role in a corporation’s globalisation efforts especially in the areas of cash management, banking, foreign exchange risk, and investments. Treasury must address challenges with managing liquidity distributed across markets, currencies, and businesses, especially the need to keep up with regional liquidity nuances and regulatory issues.

As an outgrowth of globalisation, four key external forces impact opportunities and challenges for corporate growth and expansion: economic uncertainty, geopolitical climate, regulatory environment, and technology evolution.

Eight years on from the 2008–2009 financial crises, global economic growth remains sluggish, hovering between 3.1% and 3.4% since 2012. There are numerous examples of geopolitical events exacerbating volatility, uncertainty, and risks arising from the increasing interconnectedness of regions caused by globalization. New regulations impact treasury organizations in many ways, including in-house banking, intercompany transactions, and transfer pricing documentation.

Corporate treasury organizations continue to lean on technology to facilitate change and mitigate complexity arising from global expansion. Cloud-based treasury management systems (TMS) provide an opportunity to implement specific modules on a subscription pricing basis. Governmental agencies, banks, and fintechs are collaborating to evolve complex corporate treasury services.

As discussed in the new Celent report “Globalisation: External Forces Driving Corporate Growth and Expansion," although firms are in different stages of their globalisation journeys, they can benefit from working with their banking partners to adopt strategies and tactics that address the external factors affecting corporate growth and expansion. Universal banks understand geographic differences and nuances, and are in a unique position to advise firms seeking to expand their businesses globally. This report is the sixth in an ongoing series of reports commissioned by HSBC and written by Celent as part of the HSBC Corporate Insights program.

ORACLE: Swinging the Bat in Cloud Services

It's hard to believe that an entire month has gone by since Oracle OpenWorld in San Francisco — but baseball fans will have noticed that things have been a bit hectic here in Chicago of late.  Ironically, the Chicago Cubs clinched a playoffs berth on September 18th, the very day that Larry Ellison officially opened OPEN World with his first of several Keynote presentations.



My primary motivation for attending OpenWorld was to get an update on Oracle's two banking platforms — the new flagship Oracle Banking Platform (OBP) aimed at large retail banks and its stable mate FlexCube, the universal banking platform deployed by nearly 600 banks globally.  After three days at OpenWorld, I realized that the real story of interest to banks is Oracle's emerging cloud story, which coupled with its existing core banking applications business puts them in a really interesting position to transform the core banking systems market.

Now a robust 72-year-old, Larry joked with the audience about being prohibited from climbing the stairs to the Keynote stage, but he still exhibits the intense competitive burn that served his company well during the ERP battles of the 1980s and 1990s.  The difference is that these days, he's less focused on IBM or SAP as he is two new challengers:  Amazon Web Services (AWS) on the IT infrastructure side and WorkDay on the applications side.

Of course, what AWS and WorkDay have in common are that they are both businesses with long-term prospects predicated on the continued growth and development of cloud services.  Larry's first Keynote noted that we are witnessing generational change as companies move from "lots of individual data centers" to a smaller number of "super-data centers called Clouds".  In a separate presentation, Oracle CEO Mark Hurd shared Oracle's view that within the next ten years, 80% of corporate-owned data centers will have been closed, with the remaining data centers running at 20% of today's capacity, running legacy workloads that are not easily ported to a cloud services environment (hey COBOL — I think they're talking about you!).

mark-hurd-data-center-stats

According to Larry, Oracle's "overnight success" in cloud services began ten years ago when it started reengineering its original ERP products — licensed software designed primarily for the on-premise market — into a new multi-client, multi-tenant architecture, as befitting a company that was pivoting to the emerging SaaS model.  At OpenWorld, Larry shared how Oracle was extending its original SaaS business to embrace both the Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) models — putting AWS, Google, and Microsoft all squarely in Oracle's competitive sights.

Of the three, AWS appears to be the primary target of Oracle's competitive ambitions:  Oracle's new "Gen2" IaaS platform offers a virtual machine (VM) that offers twice as many cores, twice as much memory, four times as much storage, and more than ten times the I/O capacity of a comparable AWS VM.  But there is a catch, according to Larry:  "you have to be willing to pay less" than what AWS charges for a comparable VM.  (While AWS might take issue with Larry's claims about performance and value, what is clear is that Oracle is planning a serious competitive challenge to AWS's supremacy in the IaaS race.)

In Larry's words, "Amazon's lead is over.  Amazon's gonna' have some serious competition going forward."

larry-aws

This represents great news for the growing number of banks that have gotten past the question "Why cloud?" and have moved onto the more interesting question "How cloud?".  For the largest banks like Capital One that have significant IT development capabilities in-house and with the willingness to experiment with new technologies, AWS makes a lot of sense.  Banks can roll their own code, spool up a VM, and off they go.  Capital One's cloud journey has been so compelling in fact, that the bank is in the process of closing down 5 of its 8 data centers while swinging many workloads to AWS.  Most banks, however, are not Capital One. 

For the mere mortals among us — banks coping with practical limitations on their ability to develop and host banking apps — having an IT partner with demonstrable experience on the application side and the infrastructure side can represent a real game changer in terms of the bank's appetite to make a leap into cloud-based banking services.  While some banks have in the past been a bit overwhelmed by Oracle's ambitious sales pitch featuring its all singing, all dancing suite of integrated applications ("that's very impressive, but I only want a G/L!"), with Oracle's new IaaS offering a bank could mix and match Oracle applications (offered via SaaS) with third-party and in-house developed systems.  That potentially a game changer for banks interested in cloud services, but overwhelmed by the complexity of going it alone with a public cloud provider.

That brings us back to OBP and FlexCube.  OBP is a recently built Java-based core banking solution built for the needs of large scale retail banks.  As such, OBP is aimed squarely at mainframe-based core platforms like Hogan, Celeriti and Systematics.  FlexCube is a universal banking platform and has also seen some renewed investment from Oracle in the last few years.  While today its primary market appears to be international banks, as a modular solution FlexCube can address specialized needs in the US market like cash management and trade finance. OBP and FlexCube continue to compete in the global core banking systems market on their own terms — with OBP having some recent success as a foundation for a new digital banking platform for Key Bank (Cleveland) and as the foundation of a complete core replacement project at National Australian Bank (Melbourne).

For larger banks intrigued by the promise of cloud services, but daunted by the complexity of building and operating their own environment, the opportunity to pull down an OBP license that is hosted in the Oracle Cloud while dragging other applications from their private data center to Oracle's IaaS platform could help achieve in one move the twin goals of core banking system and data center transformation.  That's a rare 2-for-1 in a world where a widely-held truism is that every IT decision involves trade-offs among alternatives.

According to Larry, Oracle's annual revenue run rate for cloud is currently about $4 billion.  Amazon recently announced that its revenue run rate for cloud services was north of $10 billion while just yesterday Microsoft announced its own revenue run rate for cloud has approached $13 billion.  These are undoubtedly different businesses (AWS is more or less pure-play IaaS while Microsoft skews towards SaaS by virtue of the strength of its Office 365 business), so I won't pretend to make any apples-to-apples comparisons.  The point remains that while it's still early in the cloud ballgame for Oracle — with deep financial resources, an impressive portfolio of banking applications, and Larry's intense "Will To Win" against the current market incumbents — bank CIOs need to pay close attention to what is going on in Redwood Shores.

“Transforming the Landscape” – My learnings from SIBOS 2016

The fall conference season is a business time for us in the industry research business. I’ve finally recovered from a hectic week in Geneva, where I met with over 40 banks, technology companies, and consulting firms to discuss what’s happening in global transaction banking. This year’s Sibos theme was “Transforming the Landscape”, organized around four themes: Banking, Compliance, Culture, and Securities. A selection of Sibos session recordings is available on the Sibos website.

With my research focus of Corporate Banking, my discussions focused on three key topics.

  • SWIFT’s global payments innovation (gpi) initiative:  SWIFT announced that it had successfully completed the first phase of the gpi pilot, surprising some bankers with SWIFT’s ability to meet the first milestone so quickly. The initial objective of gpi is to improve the speed of cross-border payments (starting with same-day) and improve transparency with new end-to-end payment tracking. SWIFT staffers roamed the exhibition hall with iPads demonstrating the gpi’s new payment tracker. It remains for banks to integrate the new payment type into their corporate digital channels and to determine product pricing.​

SWIFT GPI

  • PSD2 and UK Open Banking:  Technology providers, especially those that offer core banking systems along with payments technology, are working closely with regulators and industry groups to enhance their product offerings to accommodate the third-party account information access and payment initiation provisions of PSD2, along with the UK’s Open Banking API Framework. Looking beyond mere compliance, both providers and banks are developing value-added services to capitalize on the significant disruption arising from opening traditional banking capabilities to third-parties.
  • Blockchain in Corporate Banking:  After publishing a Celent report on use cases for blockchain in corporate banking earlier this year, I was heartened to hear “real world” blockchain announcements from the big tech companies, touting their banking collaborations. Swiss bank UBS is working with IBM on a project to replicate the entire lifecycle of an international trade transaction. The FX settlement service, CLS, is building a payments netting service that will enable cash trades on IBM’s Fabric blockchain. Bank of America and Microsoft announced their intent to build and test blockchain applications for trade finance.   Although much progress is being made by blockchain consortia, banks, and technology providers, most people I talked to believe that significant adoption of blockchain for corporate banking use cases is still a few years in the future.

I’m off next week to attend the Annual Association for Financial Professionals (AFP) conference, hoping to bring back developments in the world of corporate treasury and treasury management.

Key Takeaways from Sibos 2016

Having just returned from the whirlwind that is Sibos, I (along with many other industry observers) feel compelled to contribute my two cents on the top takeaways from the event, along with one observation on the mood. Nothing about Sibos can be exhaustive, but three key areas stood out: Cyber, PSD2, and Open Banking / APIs.

Cyber was the first topic mentioned in the opening plenary address. Its seriousness brought into stark relief by the $81mm Bangladeshi incident (something my cab driver in Boston asked about on the way to the airport!), Cyber was a focus throughout the conference. While it has long been an important issue, it has catapulted to the top of the agenda of every member of SWIFT’s ecosystem given the recognition that the system is only as secure as its weakest node.

PSD 2 is often thought of in a retail banking context, but its implications will carry over to the corporate side as well. There are two critical points: 1) Banks must make their customers’ data accessible to any qualified third party, and 2) Third parties can initiate payments. These changes will have profound second-, third-, and even fourth-order effects that can scarcely be imagined today. Banks are thinking through what they need to do to comply, as well as what their strategies should be once they’ve implemented the necessary (and not inconsequential) technology changes. For a primer on the current state of PSD2, see Gareth Lodge’s recent report on the subject.

Open Banking is enabled by APIs. While PSD2 is certainly accelerating the concept, it would have been gaining momentum even without the external pressure. There are simply too many activities that can be done better by third parties than by banks, and the banks have realized that they need frictionless ways to tap into these providers. APIs are a critical mechanism to enable this interaction. Technology, of course, is a necessary but not sufficient condition for success; banks must be culturally able to integrate with new partners quickly and flexibly.

On a final note, the mood was pragmatic. The atmosphere wasn’t one of consternation, panic, or confusion. Instead, the buzz was focused, purposeful, and businesslike. Bankers and their service providers are ready to roll up their sleeves and get the job done instead of wringing their hands about all of the possible ill-fated futures that could arise. We at Celent look forward to the progress to come in 2017. What are your thoughts?

Where Will We See You Again?

When the leaves start falling, it usually means one thing for Celent analysts – the conference season is getting into full swing and it’s time for us to hit the road big time.

The team is already busy at SIBOS this week, with BAI and AFP coming in a few weeks. Personally, I am looking forward to speaking on customer authentication at Mobey Day in Barcelona on October 5-6, as well as attending Money20/20 in Las Vegas on October 23-27.

Such high profile events are always great places for catching up with our clients and other industry experts. They are also perfect for getting up to speed with the latest developments in the industry, or, as my colleague Dan Latimore says, “soaking up the zeitgeist”. Dan will also be joining me at Money 20/20.

This year, we will be keeping an eye on (amongst many other things):

  • Which of the latest initiatives look most promising to (re-)invigorate mobile payments? Will it be Apple Pay and Android Pay on a browser, the networks’ partnerships with PayPal, 'Merchant' Pay, or something new that will get announced at the events?
  • Adoption of and developments in payments security technologies, from EMV to biometrics, and from 3DS to tokenization.
  • Innovations that drive commerce and help merchants, from bots to APIs that enable deep integration of payments into the merchant’s proposition. Also, creative application of analytics, whether to help merchants increase conversation rates, extend a loan, or deliver the most relevant and timely offer to the customer.
  • Where will blockchain fit into payments world? Ripple continues to gather momentum with cross-border payments, the UK is exploring the use of distributed ledger technologies as backbone for a domestic payments system, while IBM is partnering with China's Union Pay around loyalty. What other payments-related innovations can we expect from the blockchain community?

What will you be looking for? If you’ll be in Barcelona, Orlando, Chicago or Vegas, we look forward to seeing you. If you haven't registered, now's the time. And because of your relationship with Celent, you are entitled to an additional $250 discount off the Money20/20 registration fee. Combined with the Fall Final special you save a total of $725. Simply enter promocode Celen250 when you register here.

The Evolving ACH Landscape

We’ve been tracking blockchain, distributed ledgers, etc for a number of years, and we’ve always been enthusiastic with the promise…but pointed out that it isn’t quite there yet, at least for payments. An announcement today caught our eyes:

"The Innovation Engineering team at Royal Bank of Scotland has built a Clearing and Settlement Mechanism (CSM) based on the Ethereum distributed ledger and smart contract platform."

In the Finextra article announcing it it says:

"The test results evidenced a throughput of 100 payments per second, with 6 simulated banks, and a single trip mean time of 3 seconds and maximum time of 8 seconds," states the bank. "This is the level appropriate for a national level domestic payments system."

So first the positives. That’s significantly higher throughput than any other test we’ve seen so far, by a fair margin. It’s also faster than many other systems.

But…

We’d perhaps take issue with “appropriate level” though. Not a criticism of the test or the technology, but more a reflection of the task.

100 payments per second sounds an awful lot to those not in payments. With 86,400 seconds in a day, that’s 8.4m transactions a day. UK Faster Payments in August was running at around 3.2m transactions a day. Yet of course payments don’t flow uniformly through out the day or even day by day. Anecdotally, we’ve been told that c.70% of Faster Payment transactions are sent between the last settlement of the day and the first one the next day, a window of c. 16 hours. But realistically few of those will be made at, say, 3am. The actual window is therefore closer to 8 hours or less for those 70%. That means, even if they are running evenly, it's approximately 110 transactions per second.

The system will be scalable, so it would seem feasible for Faster Payments to be replaced by what was tested. However, in fact it perhaps highlights the real issue. On an average day, it would cope. It’s planning for the unaverage day that’s the issue. The UK ACH system, BACS, highlights this well.

BACS processes on an average day roughly 15m transactions. Given the operating window for the actual processing (10pm to 4am), that’s actually c. 700 transactions a second, significantly higher that the test through-put. But systems have to be designed to cope with worst case scenarios, referred to as peak days. These occur when month ends meet quarter ends meet various other things such as Public Holidays. The BACS record peak day to date is 103.7m. That’s a staggering 4,800 transactions a second.

What do we learn from this?

The technology being tested has evolved rapidly, and is continuing to do so. The volumes now being processed are rising rapidly. Yet today the technology probably isn’t ready for a national payment system quite yet, with the exception of some smaller countries or for specific lower volume systems such as high value. Furthermore, it's important that the systems are tested from a peak day plus a comfortable amount of head room on top (nobody wants to operate at 99.99% capacity!)

But compared to as little as 18 months ago it, the conversation has shifted noticeably from could it replace to should it replace, signifying the very real possibility that it will happen in the near future. Coupled with APIs and PSD2, the payments industry could look radically different in less than a decade.